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What Is a Deductible?

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  • Originally Written By: Michael Pollick
  • Revised By: Wanda Marie Thibodeaux
  • Edited By: Lindsay D.
  • Last Modified Date: 17 November 2014
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A deductible is a sum of money a person pays before a company will provide the benefits outlined in an insurance policy. The payments are useful for keeping the cost of insurance low. The amount varies, with lower deductibles generally associated with higher premiums. They are fairly standard on most types of policies, especially ones related to automotive or health coverage.

Purpose

The main purpose of a deductible is to prevent people from making claims when the cost associated with a loss, damage or need is fairly small. This leaves the company more time and financial resources to handle more costly claims. These fees also make insurance more affordable, because when the policy holder shares some of the claim costs, the issuer doesn’t need to charge excessively high premiums. They let consumers manipulate policy costs, as well, which enables them to get coverage without too much of a financial strain.

How It Works

When a person needs to make a claim, he first “meets” (pays in full) the deductible. The insured individual therefore has to put some of his own money forward to cover his loss, damage or need. The company then steps in to cover the rest of his costs up to the limits outlined in the policy.

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As an example, if a policyholder gets into a car accident resulting in $1,000 US Dollars (USD) worth of damage and had a deductible of $500 USD, he first would pay $500 USD to the repair shop. The insurance company would pay the rest of the costs. Even though the car owner still needs to pay a portion of the repair bill, his total expense is cut in half because his payment qualifies him to receive some coverage.

It is important to note that some policies have exceptions. A health insurance policy, for example, might cover the cost of an emergency room visit even if the insured person doesn’t meet his deductible. The exceptions are always clearly outlined in the policy.

Amounts

The amount a person pays before his insurance coverage kicks in depends on the type of policy he has and the company with which he works. In many cases, it's linked to the cost of the premiums an individual pays regularly to maintain the policy. When a person opts for a low deductible, the issuer generally requires higher premiums because it is more likely that the amount will be met, forcing the business to pay out on the policy. If an individual chooses a high amount, the issuer is likely to require a lower premium, because the client has to pay more out of pocket before the insurance company becomes responsible for coverage.

Selecting a low amount can be good for some policyholders because, if something goes wrong and a claim is necessary, they don’t need to put a lot of their own money forward before the issuer will make a payment. On the other hand, the required higher premiums can go to waste if the customer never needs to make a claim. For this reason, some experts recommend that healthy individuals or those with a history of very few claims choose to pay more.

When a customer opts for a higher out-of-pocket expense, the lower premiums can reduce any immediate financial strain. More money can go to other areas of the person’s budget. The risk here is that, if the insured person assumes he will not need to make a claim, he might not set enough money aside to cover the high deductible. If something goes wrong, having to pay so much might not be possible without dipping into savings or other funds.

Calculation

Most commonly, insurance companies calculate deductibles every year or per incident. This means that the amount doesn’t necessarily “roll over” or extend throughout the life of a policy. In some cases, the deductible must be met for every car accident, even if they happen within the same year. Health insurance deductibles usually reset at the beginning of the year. It is a good idea for customers to calculate how much it will cost to pay multiple times throughout the policy to determine whether rates are truly affordable.

Policy Application and Regulation

Insurance companies can require these out-of-pocket payments on just about any type of policy. They are fairly standard, however, on both health and automotive policies, and their commonality has led to industry and legislative regulations designed to protect the consumer in many places. Not all policies include deductibles, however, with many health maintenance organizations (HMOs) not using them.

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Discuss this Article

anon329464
Post 34

My mom has damage all over her car. They say it was separate incidences so instead of paying $1000 in deductibles they are asking us to pay $4000.

this is in California. is this legal?

anon321019
Post 32

Angie is considering the options for deductibles on her auto insurance. She can save $150 a year by switching from a $500 to a $1,000 deductible. What is a deductible?

anon219348
Post 28

If you're unlikely to get sick, go with high deductible and low premium.

anon153094
Post 27

Those private insurance companies in the USA are just for profit and cost Americans a fortune. I am glad that in my country (European country) we have a universal health insurance. Every month you pay a certain amount of money (depending on your salary) and you are 100 percent covered. For example, I pay € 200,- every month and there are no deductibles, no co-payments or anything similar.

It does not matter what kind of treatment you need, everything will be paid by the insurance company. I can go to any hospital or to any doctor in the whole country and I will be treated for free.

Everybody is automatically insured, and the kids are insured for free. It does not matter how old you are or how sick you are or what kind of past you have, everybody in my country is entitled to health insurance and will not be declined. It is a shame that a country like the USA is not capable of having a proper health insurance!

anon79635
Post 19

This deductible thing is so stupid. This is nowhere else but in america, because here the government steals from the people literally and people pay taxes and actually don't get anything in return except nice roads and wars!

What about the people? if you have no money for insurance you are dead! what kind of country is this? The government should work for people not people for the government!

how can somebody who gets $10/hr and pays $900 for rent every month afford health insurance? Not only that we pay for insurance which costs an arm and a leg, but at the end we have to pay deductibles and copays and co insurance.

anon76631
Post 18

Could anyone tell me where I can get a list of deductions for filing a 1099 with a detailed description for what is allowed. Example: Mileage. I was told by someone i could not count my mileage to a job (since i would be driving to a place of employment anyway if i was employed as a regular employee) W2. Now i am working as a 1099 full time at one particular job.

Please, if anyone can help, let me know.

anon75522
Post 17

what happens to an insurance premium when a deductible is lowered?

the premium will simply be higher. unless the owner of the insurance company is your father.

tya - denpasar

anon74874
Post 16

If i paid my health insurance deductible in Oct. 09 is it good until Oct 10?

anon58856
Post 15

In the construction industry, normally the client asks the contractor to get the policy on behalf of client and the client will decide the deductibility limit (Contracts according to FIDIC-yellow book) such as 10,000 Euro. Then who will be responsible to reimburse the damages cost to the contractor which below the 10,000 Euro limit? Can the contractor ask the client to reimburse the cost?

anon56378
Post 14

If an auto insurance deductible is expected to be refunded (due to 100 percent fault of the other party in an auto collision).

According to California law, how long can an auto insurance agency withhold from issuing the refund to the policy owner after the "other" party has paid the policy owner's insurance in full?

anon42776
Post 12

what if my health insurance deductible is zero but annual out of pocket max is $6k? What would I actually be responsible for paying? How does annual out of pocket and deductible differ when in my case, the deductible is zero, which, in theory, I've already "met" my deductible from the get-go, but then I have this $6k out of pocket... it seems to me that the $6k might as well be the deductible? Help! I'm confused!

orocac14
Post 11

What about if i am paying my family plan with 10,000 deductible and i use the insurance only to take my son to the annual check up office visit, my wife and me don't use the insurance in the whole year. I still have to pay the 10,000 usd a year? Sorry this is complicated theme for me. Thank you.

abcjuan
Post 10

My question is about a non-life insurance policy called Industrial All Risk Insurance Policy.

In our policy, we have 5 & 2 deductible, our policy has been extended with same terms and conditions, would the deductible be a new set of 5 & 2 or will it still be the old deductible that will apply to which in case of loss, we can add it up from the older ones as aggregate to consume the 5 & 2 from the expiring policy? Thank you and hope that you will reply.

elewis219
Post 9

If your car is hit while parked, and the other driver wants to have his insurance company cover the damages, why did we have to pay our deductible? Shouldn't the at-fault driver's insurance cover that?

anon20424
Post 8

If you have a low deductible your insurance premiums will be higher.

anon8760
Post 7

Once we chose the medical plan with a deductible, do we need to pay this amount every year or would it be accounted till we opt out of the plan, please give a detailed reply. Thanks.

anon8293
Post 6

Deductibles in medical insurance usually cover one year. So, if you visit a doctor a lot during the year, you might pay, say, $100 per visit until your deductible for that year is met. Then, your office visits will be lower, depending on the specific insurance plan you have. Deductibles in auto insurance plans are usually by the accident. For example, if you are involved in a single vehicle crash and the damage is, say, $2500 and your deductible is $500, you pay the first $500 and the insurance picks up the $2000. On the way home from the body shop, you get into another crash, you would have to pay the deductible again. Each policy is different and it is up to you to understand the details, so ask plenty of questions until you completely understand how it works.

anon2685
Post 3

Is the deductible a one time fee, or does it apply to every visit to a doctors office. For instance, if you had to have make several visit to the doctor and each visit costs exceeded your deductible.....

Dayton
Post 2

In my experience with car and health insurance, if you want your deductible to be lower, your premium will be higher. One example of this is a high deductible health plan (see http://www.wisegeek.com/what-is-a-high-deductible-health-plan.htm ), where you pay very low premiums in exchange for high costs, should you actually use the insurance.

anon1361
Post 1

what happens to an insurance premium when a deductible is lowered?

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